Time-Varying Consumer Disagreement and Future Inflation

Abstract

The inflation expectations of over 285 thousand consumers are used to develop ‘model-free’ estimates of the monthly cross-sectional mean, dispersion, asymmetry and extremeness of inflation expectations from 1995 to 2016. The moments provide a novel and direct measure of time-varying consumer disagreement about prices. I find that the higher-order cross-sectional moments of inflation expectations are highly informative about future inflation. In contrast to popular assumptions, these moments do not appear to be noise. Even after accounting for historical economic data, the ‘unanticipated’ components of the higher-order moments are significantly associated with future inflation. In effect, the higher order moments are neither noise nor conventional economic news. The results have significant implications for the widespread practice of trimming inflation expectations data. The results also have implications for the study of information rigidities, indicating that consumer inflation expectations broadly reflect two types of consumers. The first type update their information set at a much faster rate than is typically estimated or assumed. The second type have very high information rigidities and only update their information set in response to major economic events.